Commerce Minister Duncan Webb says bank profits are top of mind when considering the next market study, but no decision has been made yet

The Labour government has again hinted it will direct the Commerce Commission to conduct a market study into the profitable New Zealand banking sector. 

Duncan Webb, the Minister of Commerce and Consumer Affairs, said on Tuesday bank profits were “front of mind” although no decision had been made on the next market study. 

Another possible candidate would be the insurance industry, which is dominated by Australian firms IAG and Suncorp which both reported profit increases in 2022. Government agencies have previously expressed concern about competition in the industry and even suggested a market study was necessary. 

Webb wouldn’t rule out directing the Commerce Commission to investigate the sector but told reporters that bank profits were more salient.    

On Monday, Prime Minister Chris Hipkins also refused to rule out a market study when asked at his weekly press conference. 

“We’ve previously signalled that we’re concerned about the level of bank profits and that’s something that we will take some time to look at.

I haven’t got an announcement for you on that particular topic today, but it is something that we have foreshadowed previously that we would look at,” he said.

Andrew Bayly, the National party’s commerce spokesperson, said market studies should only be done when there was a  “genuine need” and not just “for the sake of it”. 

“There is an expectation that we need to review every sector, but we need to be careful about which sectors we do — because once you launch these things there are a lot of connotations around them.” 

National supported the study of the grocery sector and would review bank profits at a committee level, but wanted to see a more “judicious approach” to full-scale studies. 

Big profits nothing new 

Last week, ANZ New Zealand reported a cash profit of $1.1 billion in the six months ended September 30, a 14% increase from the same period in 2022. 

BNZ’s cash profit rose 20% to $813 million, but Westpac NZ’s underlying profit dropped 15% to $467m. Kiwibank and ASB do not report their profits during this period.  

While nominal profits have been climbing significantly, better measures of profitability, such as the return on assets and return on equity, have been fairly flat. 

The Reserve Bank said in its May Financial Stability Report that banks were not meaningfully more profitable now than they had been in the past 30 years.

Rather, the large NZ banks have been making more money than both the wider sector and large banks in comparable economies for many years. 

The central bank said the difference in profitability could reflect a lack of competition, although it also suggested some other possible explanations. 

For example, the higher profits are largely due to NZ banks being more cost efficient—meaning they spend less to provide the same services—which may be due to economies of scale.

Another possible explanation was that Australian shareholders required higher returns from NZ assets to receive the same after-tax return as from an Australian operation. 

The RBNZ said having profitable banks was beneficial for financial stability, although it has also signalled it would support a market study.

Excess profit tax 

The Green Party supports a market study, or an inquiry of some kind, and would like to impose an excess profit tax on banks. 

Co-leader James Shaw said it would be worth digging into the underlying reasons as to why bank profits were so high. 

“But other countries, including Margaret Thatcher’s United Kingdom, have put in place excess profit taxes,” he said. 

Nicola Willis, deputy leader of the National Party, has been calling for a Parliamentary inquiry into bank profitability since March 8, but is less supportive of a market study. 

“Let’s let the Finance and Expenditure Committee have a look at this issue; call the banks in and ask some of those questions”.

Data does show that NZ banks are particularly profitable and it was Parliament’s job to ask why, she said. Labour chairs the committee and has not supported an inquiry. 

BGF proposal in the works

Meanwhile, the government's working on a proposal for a Business Growth Fund (BGF), which could see major banks stump up tens, or hundreds, of millions of dollars to be equity investors in small and medium-sized businesses. 

Last year's Budget proposed a BGF modeled on ones in Australia, Canada and the UK, to improve SMEs' access to finance. Up to $100 million was earmarked for Crown investment as a minority shareholder in the BGF alongside banks. This followed a recommendation from the Small Business Council's New Zealand Small Business Strategy in 2019 to establish a BGF. (There's more about the BGF proposal here).